Stock Options Are Adjusted After Many Share Prices Fall

Friday

In an effort to retain workers, executives at dozens of public companies have taken steps to lower the prices that their employees would have to pay to convert options into stock.

Employee pay is often tied to a company’s fortune — until things turn sour.

Composite Technology, which makes electric cables and other products, decided in January to lower the price at which its workers could use their stock options to buy shares in the company. The managers and directors slashed the price on all of the company’s 23.4 million options to 35 cents.

The move still leaves the company’s chief executive, Benton H. Wilcoxon, and others holding options that are underwater — meaning the price of exercising the options is above the current market price. But now Mr. Wilcoxon will be able to book a profit if the stock price increases by less than half, rather than quadrupling.

The repricing could be of particular benefit to Mr. Wilcoxon, who has a whopping 4.2 million options, previously priced at $1.13. The company lost $53 million in its latest fiscal year, and its stock fell to 27 cents on Thursday from as high as $1.36 last July.

Executives at dozens of public companies, including Starbucks, Google, Intel and smaller enterprises like Composite Technology, are taking steps to lower the prices that their employees would have to pay to convert options into stock.

The moves are usually described as important for retaining employees, especially as stock options that vest over several years look utterly worthless in the current market. With prices plunging across a variety of industries, companies also often assert that stock price movements are not really a reflection of employee performance.

But the moves leave shareholder advocates fuming. Owners of company stock reap no monetary benefit from repricing of options, advocates say — only employees do. The process, in their view, is fundamentally unfair. Modifying the options means employees gain from stock price increases, while investors feel the brunt of stock price declines.

“A stock option is supposed to align the interests of employees and shareholders by putting them in the same boat,” said Patrick McGurn, special counsel to the RiskMetrics Group, which acquired Institutional Shareholder Services in 2007. “Repricing of options breaks that linkage.”

Many companies point out that it is not just the top executives who benefit. Google is giving all its employees a chance to swap their underwater stock options for new ones with a lower exercise price, pointing to the stock’s nearly 60 percent decline from its 2007 high.

Some companies are going further and specifically excluding top officials, perhaps sensitive to complaints that executive pay has gotten out of hand. Shareholders of Starbucks voted this month to permit a program that would allow the company’s employees to exchange some options for fewer new options with lower exercise prices. And Intel on Monday asked shareholders to approve an option exchange program at its annual meeting in May. Both programs eliminated top officials and board members.

While dozens of companies are now trying to reprice their stock options, the numbers are not as high as they were after the technology bubble burst earlier this decade, said Alexander Cwirko-Godycki, research manager at Equilar.

But, he added, “I am constantly surprised at the pace with which this trend is gathering steam.”

According to Equilar, which collected data for The New York Times on companies’ repricing activities, at least 25 companies modified option prices in the first three months of the year, either directly or indirectly by allowing employees to exchange options for new ones with lower exercise prices. At least 23 have proposed modifications this year.

The total number of programs in various stages already exceeds the action in 2008, when 51 companies undertook repricings or exchanges.

In recent years, stock exchanges have adopted rules that generally require shareholder approval for companies to reprice or exchange options. But there is more variety in the repricing programs adopted by different companies than in the past.

Like Intel, they are barring top executives and board members from having their option prices adjusted. Others are modifying the price adjustment based on the seniority of the employee holding the option.

By comparison, a program by ValueClick, an online marketing company, to buy underwater options was open to all employees, as was the repricing plan carried out by Composite Technology.

“Market conditions are such that the share prices suffered despite the performance of management,” rather than because of it, said James Carswell, vice president for investor relations at Composite Technology. “It would be great if we could go back and reprice the stock purchase price” to benefit investors, he continued. “We don’t have the ability to do that.” Companies may have previously asked shareholders for blanket approval to change an options program.

Google, for example, already had a plan in place that generally permitted an exchange of employees’ options, so the company did not give investors a say over its latest exchange. Mr. Carswell of Composite Technology said the company already had similar approval.

A few companies have run into serious shareholder resistance. Managers of Arrowhead Research, a nanotechnology company based in Pasadena, Calif., did this month after seeking to lower option exercise prices.

“Shareholder feedback to the proposals, however, made it clear that there is significant concern over the repricing structure proposed,” Christopher Anzalone, the company’s chief executive, wrote in a letter to shareholders. “It is critical to us that our shareholders have confidence that our interests are aligned, so we are withdrawing the proposals.”

Granting options is not likely to become less popular, though. Companies’ low stock prices are encouraging other companies to grant new options, said Jonathan Ocker, chairman of the compensation and benefits group at Orrick, Herrington & Sutcliffe in San Francisco.

“I’m seeing more and more companies considering granting options now, because there’s no place to go but up,” Mr. Ocker said. He paused, then added, “It’s either going to go up or we’re in real trouble.”

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